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Demographics

Pensions for all elderly people

by Charles Knox-Vydmanov

In depth

China’s New Rural Pension Scheme reaches 133 million people over the age of 60: elderly Chinese men.

China’s New Rural Pension Scheme reaches 133 million people over the age of 60: elderly Chinese men.

An increasing number of developing countries is taking steps to rapidly increase coverage of social pensions for older people. The implications are of critical importance to wider development.

One of the most striking shifts in the global development debate over the last decade has been the startling rise of social protection. It used to be a relatively marginal issue, but there has been an explosion of research and debate on it. Last year, a new recommendation on "social protection floors" was endorsed by the International Labour Conference, whilst the recent reports of the UN High Level Panel and the Secretary General suggest that social protection will gain a prominent place in the post-2015 agenda.

There are several reasons for such growing interest. Many more countries are implementing social-protection programmes, which has led to greater visibility of these approaches, as well as more and better-quality research on their feasibility and impacts. The use of social protection as a counter-cyclical response to the global economic crisis by countries such as Brazil and China has also turned attention to the issue. But at its core, the greater attention to social protection signals a more fundamental shift from the mainstream development model based on self-help approaches or the assumption of trickle down effects from economic growth. Instead, governments must ensure a minimum level of social protection so that the whole population can enjoy the right to an adequate standard of living.

 

Demystifying social pensions

Social protection embodies a myriad of different kinds of programmes; one of the most popular approaches is "social" pensions that do not depend on the person concerned having contributed to some kind of social-protection fund. Social pensions are state-provided, non-contributory cash transfers to older people. This is not a new idea. The first social pensions emerged in the early steps towards comprehensive social-protection systems at the turn of the twentieth century in countries such as Denmark, Australia and Britain. They continue to play a core function in the systems of more developed countries.

Yet it is only in the past decade or so that social pensions have risen to prominence as a social-protection tool. According to HelpAge International’s Pension Watch database, 101 countries now have a social pension, with over half of them introduced since 1990, and 33 since the year 2000. Notable examples include the introduction of the New Rural Pension Scheme in China in 2009, which reaches 133 million people over the age of 60. In 2008, Chile transformed its existing poverty-targeted scheme into a solidarity pension aimed at the bottom 60 % of the income distribution.

It might be expected that the rising popularity of this social-policy tool amongst low- and middle-income countries would have gained the attention of the development community, but this has largely not been the case. For many development practitioners, the fact that governments want to spend their limited tax revenues on supporting older people provides a puzzle. Older people are usually considered as one of a long list of vulnerable groups, and far from the greatest priority. There is limited recognition within the development community of the rapid population ageing that is set to transform the demographic profile of most developing countries in the coming decades.

Yet perhaps even more surprisingly, social pensions have often not gained the attention of many organisations which focus on pensions and social protection. Since the foundation of the International Labour Organisation in 1919, through to the prominence of the World Bank in this area since the 1990s, the social-security debate has generally revolved around contributory programmes. The shared assumption has been that coverage of contributory social security in developing countries would follow the route of many OECD countries and eventually include the vast majority of the population. In this light, the expansion of non-contributory schemes, such as social pensions, challenges orthodox social-protection thinking.

The result of these perspectives has been that development practitioners often dismiss social pensions as part of an alien "pensions" debate, and pension practitioners dismiss social pensions as "social assistance". That such a prominent social-protection tool should be an orphan of both debates is alarming.

 

Why should we care?

It is conceivable that the lack of enthusiasm for social pensions is justified. The decision of national governments to implement social pensions might, as is sometimes suggested, be the cynical response of politicians to please certain interest groups. Yet this argument, which has been exported from debates in wealthier countries, doesn’t match the numbers in low and middle-income countries. In countries such as Lesotho and Peru, where social pensions have become hot election topics, older people make up seven percent and nine percent of the population respectively, so the motive cannot be to cater to an important voters base.

However, social protection is a fundamental concern. Research shows that social protection in old age – or its absence – has major impacts on people of all generations. In absence of a formal social protection system, there are two extreme scenarios for an older person: depend on family and other networks, or go through it alone and make sacrifices in terms of wellbeing. Up to now, discussion around old-age social protection tends to focus on those older people who don’t receive support. The eligibility criteria for the social pension in Belize, for instance, is typical of such thinking, limiting the benefit to older people with "no source of income or inadequate means of support".

In countries with strong traditions of families caring for the aged, particularly in east Asia, social pensions are often argued to be unnecessary. It is neglected, however, that doing so is a huge burden for families, networks and wider communities. There are considerable economic shocks. When an older person gradually withdraws from the workforce, a household will have lost income that was previously earned. Meanwhile, to sustain his or her standard of living, the older person not only needs financial support, but potentially additional support as costs relating to deteriorating health increase.

The scale of this issue is significant. In countries where HelpAge has assessed the data, it is common for 20 % to 30 % of the people to live with an older person, and many more will share financial networks. In Myanmar, where there is virtually no old-age social protection, 84 % of older people receive financial support from adult children. For families living in poverty, tough decisions have to be made about how to invest household resources. In these scenarios, social pensions not only maintain the living standards of older people but help households to invest elsewhere. Research in South Africa found that social pensions led to increases in the height of granddaughters of two to four centimetres. A recent study of Bolivia’s universal pension found higher school enrolment and significantly lower child labour in households receiving the pension.

This evidence does not imply that families completely end their support to older people. The reality is that most existing social pensions are too low to allow older people to be independent. Families continue to provide support even when pensions are in place, but social pensions reduce the full brunt of old age security, particularly for low-income families.

What people envision for their old age also affects behaviour throughout the life course, with wider implications for society and the economy. In China, pension coverage used to be limited, and people have few children they can count on in old age, so savings rates are high, particularly for people in their 50s. A core government motive for expanding social pensions in China’s rural areas was to increase household consumption and stimulate economic growth.

The importance of social protection in old age becomes even greater when considering the rapid societal ageing that developing countries are set to experience in the coming decades. The total number of older people will increase from 809 million in 2012 to 2 billion in 40 years and many of them will live in less developed parts of the world. Africa alone, representing a big share of today’s younger population, will see its 60+ population increase by the factor 13 by 2050.

 

A new model of social ­protection in old age

Even if we accept the importance of old-age income security for development, addressing the issue entails revisiting old assumptions about how social protection should be built. Much global thinking around social-protection systems has been based on the experience of more developed nations. The dominant model in these countries, including France, Germany and the USA, has been that of contributory social insurance, the so-called Bismarck model. The idea is that all workers contribute payments, and that redistribution within the system plus government subsidies ensure a minimum standard of life to all. Women who did not do paid work would gain entitlement through the contributions of their husbands, while those falling through the gaps receive social assistance.

This model has been very successful in a number of more developed countries, but it faces major challenges in less developed countries. The central problem is that the scale of informal employment is much greater in most developing countries than it was at the time when social insurance schemes were introduced in Europe and North America. Moreover, the poverty rates are high. Accordingly, the majority of the workforce simply cannot make regular contributions to social-protection funds. Whilst most developing countries have some form of formal social insurance scheme, many dating back to the 1950s, coverage in the vast majority remains very low. For example, despite major efforts to increase coverage in Latin America, only around 40 % of the current workforce contributes to a pension scheme.

Social pensions are an obvious way to fill this gap, and to some extent the social protection debate has recognised this. Yet it is often framed as a stepping stone to the ultimate goal of universal contributory social insurance. It is puzzling why this should be the case. In more developed countries there are many examples of countries that never chose the option of contributory social insurance. For example, New Zealand’s pension system principally consists of a universal pension to everybody over 65 years, with supplementary savings through a separate scheme. Far from being a costly extravagance, New Zealand’s pension spending is one of the lowest of OECD countries, while it also has some of the lowest rates of old age poverty. This suggests that social pensions may not merely be a stop-gap towards the normative model of social security, but could signal the first step towards a different model.

 

What is to be done?

Assuming we live long enough, old age is something we will all eventually experience. Growing old is therefore a universal human concern, and social security in old age a human right. Social protection systems can assist states to fulfil their obligations to ensure minimum essential levels of economic, social and cultural rights. At the same time, social pensions have the potential to contribute to developmental impacts for the wider society.

Social pensions are by definition programmes that should be implemented and financed by the state. Some might therefore conclude that the role for external players to support and influence these processes is minimal. HelpAge International’s experience working on the issue shows that there are a variety of ways in which non-governmental and international actors can support this process. This relates to the supply side of social pensions through provision of technical assistance to governments on design, implementation and fiscal feasibility. At the same time, civil society needs support in influencing policy and holding governments accountable on the delivery of existing schemes.

 

Charles Knox-Vydmanov is social protection policy adviser with HelpAge International.
[email protected]